Date posted: 15th Dec 2021
As we have mentioned on several occasions, the super deduction is a very valuable tax relief for those companies looking to invest in plant and machinery.
A re-cap of the relief is available at https://www.cliveowen.com/2021/09/super-deduction-a-recap-of-the-new-relief/
We feel it is worth reminding you that the relief will decrease from as early as 1 April 2022, particularly where accounting periods will straddle 31 March 2023, as the rate becomes apportioned based on the days falling either side of 1 April 2023.
Finally, whilst your company may be loss making, you can still take advantage of the deduction. It just means that you are increasing losses to offset in the future, perhaps attaining a higher rate of tax relief…
Joe Bloggs and Sons Limited has forecasted tax losses to carry forward of £1,000,000 at 31 March 2023. However, the forecasted profit for the year to 31 March 2024 will be £2,100,000, if the company invests £100,000 in new machinery.
The forecasted tax bill for the year to 31 March 2024 is therefore £275,000 ((£2,100,000 – £1,000,000) x 25%). If the company spends the £100,000 on the new machine in the year to 31 March 2024, then the company will save £25,000 in tax, reducing the tax bill to £250,000.
However, if the company brings forward the expenditure to the year to 31 March 2023, this will increase losses by £130,000 as a result of the super deduction up lift, which means that the company will then be able to offset a further £30,000 of losses in 2024, saving another £7,500 in tax.
The tax saving on the new machine is £25,000 if bought in the year to 31 March 2024 compared to £32,500 in the year to 31 March 2023.
Of course, commercial considerations come first, especially in relation to cashflow, as it not necessarily recommended to spend cash that will be required for working capital, simply to save tax. However, where there is headroom to spend, then perhaps getting a tax relief as high as c34.5% (due to the marginal rate) should be a consideration.
If you have any capital allowances queries, please contact us here.